SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[Fee required]
For the fiscal year ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[No fee required]
Commission File Number 0-16322
ECOS Group, Inc.
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(Name of Small Business Issuer in Its Charter)
Colorado 84-1061207
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
99 Southeast Fifth Street, Miami, Florida 33131 33405
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(Address of Principal Executive Offices) (Zip Code)
(305) 374-8300
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Issuer's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.012 par value
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Title of Class
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year: $4,814,116
The aggregate market value of the voting stock held by non-affiliates of the
Company was approximately $1,238,543 on the average bid and asked price of
$.0625 on June 30, 1999.
As of March 31, 1999, the Company had a total of 20,266,693 shares of Common
Stock outstanding.
Transitional Small Business Disclosure format (check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) Business Development
ECOS Group, Inc. (the "Company") has been in the environmental business
since 1993. In January of 1993, Evans Environmental Corp., a Florida corporation
was purchased by CBLX Holdings, Inc., a Colorado corporation, in a reverse
acquisition. The name of CBLX Holdings, Inc. was changed to Evans Environmental
Corp. to reflect the new line of business of the Company.
In July of 1996, Evans Environmental Corp. purchased American Remedial
Technologies, Inc. ("ART"), a Florida corporation that was engaged in the
remediation of contaminated soils. The Company then changed its name to ECOS
Group, Inc. to reflect the broader business interests of the Company with its
new subsidiary.
In October of 1997, the Company disposed of ART to cure the defaults ART
had incurred on loans that had supported ART. This subsidiary had never achieved
the projections, which had been prepared for this subsidiary. The Company
currently operates with one active subsidiary, Evans Environmental and
Geosciences (EE&G).
(b) Business of Issuer
The Company is a holding company, which currently has EE&G as its only
operating subsidiary. EE&G is a regional supplier of environmental consulting,
testing and engineering services to both private clients and various levels of
government clients, emphasizing the three major practice areas of Asbestos,
Hazardous Substances, and Indoor Air Quality. The market for environmental
consulting, testing, and engineering developed in response to, and is driven by,
regulatory and civil liability. The environmental field grew rapidly through the
decade of the 1980's, but, in the opinion of Management, the growth has
drastically diminished yielding to a relatively mature market.
Within the broad scope of environmental consulting, testing, and
engineering services, EE&G offers specialized services in three practice areas:
Asbestos, Hazardous Substances, and Indoor Air Quality. While management is
constantly evaluating opportunities in other lines of business, expansion plans
for this year focus primarily on increasing market share within the Company's
existing market (primarily Florida) and also expanding EE&G's geographic reach,
enabling it to supply its current scope of services over a larger geographic
region. Management is also currently evaluating acquisition possibilities for
the upcoming year.
The Asbestos Practice
EE&G provides a comprehensive suite of Asbestos consulting services,
including:
o Building inspections and assessments.
o Laboratory analysis of building materials.
o Abatement design specifications.
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o Contractor performance and compliance monitoring.
o Air quality testing.
o Training.
o Expert witness testimony.
This practice area currently supplies approximately 43% of EE&G's total
revenues. In the early 1990's, Asbestos supplied nearly 90% of EE&G's revenues.
The percentage of EE&G's revenues supplied by the Asbestos practice has
decreased dramatically in the past few years. This decrease in the percentage of
Asbestos revenues is attributable to a lack of growth in the Asbestos practice
compared with solid growth in the Hazardous Substance practice.
Management sees little opportunity for significant growth within the State
of Florida in the Asbestos practice area. An aggressive state enforcement
program in the early part of this decade combined with the limited use of
asbestos products in Florida construction both due to the mild climate and youth
of many of the buildings has had a negative impact on this market. Management
believes that greater opportunities for growth in this practice area are to be
found in geographic areas where the cities and their infrastructure are older
and the climate is cooler. Accordingly, Management is currently working toward
expanding into the Northeastern portion of the United States.
In March of 1998, Management laid the beginning groundwork for expansion of
its Asbestos practice into Europe through the sale of intellectual property to a
privately held, development stage, French company based outside of Paris.
Management will also supply professional services to this company and lease
certain equipment to this French company. In return for the above described
goods and services, EE&G will receive 5% ownership in the French company in
addition to a 2-1/2% royalty on revenue for three years, monthly lease payments
and monthly payments for services. The French company is also responsible for
establishing a French corporation, to be known as EE&G Europe, SARL, including
the initial capitalization of that corporation as required by French law. EE&G
will own 80% of the newly established French corporation. As of March 31, 1999,
the French company was delinquent in its obligations to the Company and the
Company was considering more aggressive collection efforts.
The Hazardous Substance Practice
EE&G's Hazardous Substance (HS) practice area comprised nearly 47% of
EE&G's gross revenues in FY 1999. The HS practice consists of professional
employees with backgrounds predominantly in geology, engineering, biology, and
other natural sciences. The staff includes a variety of registered
professionals, including Professional Geologists, Professional Engineers, and a
Certified Hazardous Substance Manager. The primary project types in which the HS
practice area earns its revenues are as follows:
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o Soil and Groundwater Assessment and Remediation. The largest source of
revenue in the HS practice area in FY 1999 was the assessment and
remediation of soil and groundwater contamination incidents at
municipal, commercial, and industrial facilities. Due to the sensitivity
of the groundwater aquifer system in Florida and increased regulatory
pressures, EE&G clients continued to pursue investigation and
remediation of soil and groundwater on their properties that had been
contaminated with petroleum hydrocarbons, chlorinated solvents, heavy
metals, and pesticides and PCBs. EE&G performed numerous design/build
services for clients, performing the engineering design, construction
management, and actual construction and operation and maintenance of
remediation systems.
o Real Estate Transaction Audits/Due-Diligence Audits. Since the
Superfund Amendments Reauthorization Act (SARA) of 1986 potential
buyers, financers, mortgagers, etc. of commercial property are advised
to conduct an environmental audit of the property prior to closing. This
is often referred to as the "Buyer Beware" rule. Since the national
economy continued to be strong throughout FY 1999, the HS practice
continued to see significant revenues from environmental audits relative
to real estate transactions.
o Petroleum Storage Tank Management. On December 31, 1998 the
Federal and State deadline for required upgrades to underground storage
tank (UST) systems expired. EE&G continued to obtain a fair amount of
business in the assessment, remediation, closure, design, and
installation of UST and aboveground storage tank (AST) systems. As this
deadline is now passed, management anticipates a decline in the demand
for this service in the latter half of calendar year 1999.
o Compliance Audits. EE&G was active in performance of compliance audits
in FY 1999, primarily for its industrial/manufacturing clients. EE&G
assisted its clients by bringing their facilities into compliance with
environmental regulations and best management practices, which typically
result in waste minimization and costs savings to the client.
o Engineering/Design. EE&G continued to expand its engineering
capabilities in FY 1999. EE&G engineers completed projects involving
soil and groundwater remediation systems, storm water management
systems, sanitary sewer systems, pollution prevention equipment, HVAC
design and various types of permitting.
The Indoor Air Quality Practice
Industrial Hygiene is defined as the recognition, evaluation and control of
workplace hazards. This definition has recently expanded to include
non-traditional issues in work environments in which industrial hygiene has not
traditionally been practiced. EE&G's Indoor Air Quality (IAQ) practice area
accounted for 10% of the Company's gross revenue in FY 1999.
The primary project types in which the IAQ practice earns revenues are as
follows:
o Industrial Hygiene Evaluations. This typically involves the
collection of air sample data for specific chemical or physical agents,
and relating them to established
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exposure standards. This type of work is driven by the Occupational
Safety and Health Administration (OSHA), and takes place in industrial
facilities where employees are exposed in the normal course of their
work. These projects account for less than 10% of the revenues for the
practice area, and is not considered to have significant growth
potential. This limited growth potential is due to limited enforcement,
a lack of unions in Florida, few "smoke stack" industries in Florida,
and competition from insurance companies who offer similar services to
their clients.
o Indoor Air Quality Services. These projects involve the investigation
of unknown agents primarily in commercial and municipal buildings that
are resulting in occupant illness and discomfort. EE&G conducts initial
IAQ investigations, and offers comprehensive design solutions to
remediate IAQ issues. Currently there are no regulations driving these
projects, and there are few established standards to compare and
evaluate data. Increased public awareness, combined with several large
legal cases involving "sick building syndrome" have resulted in a
significant increase in the demand for IAQ services. EE&G's IAQ services
expanded in Fiscal 1999 to construction management and oversight of
architectural and mechanical modifications/renovations to building
components and heating, ventilation and air conditioning systems
relative to building IAQ problems. Due to a new contract signed in July
1999, Management anticipates that the IAQ construction management
services will comprise 50% of the IAQ practice. Due to this new
contract, the IAQ practice revenues are expected to double in Fiscal
2000. IAQ projects currently account for approximately 70% of revenues
for the practice area.
o Lead-Based Paint (LBP) Services. LBP was applied to a wide variety of
surfaces for many years. The presence of LBP now represents a potential
source of environmental pollution if the paint is either in poor
condition, or is improperly removed and disposed of. EE&G offers LBP
inspection services utilizing state-of-the-art instrumentation, as well
as complete design and construction management services for LBP
abatement projects. LBP services currently account for approximately 20%
of revenues for the practice area. There are several regulations that
impact this type of work, and a general increase of awareness among
existing clients has resulted in a 10% growth of LBP services in FY
1999. Continued growth is expected in FY 2000. There are currently
several proposed regulations that, if passed, may create a significantly
increased demand for LBP inspections. EE&G is monitoring legislative
progress in this area so as to be prepared to meet a sudden increase in
demand for these services.
Marketing
Marketing and sales efforts by EE&G to attract and maintain its client base
include the concentrated efforts of two full-time marketing and sales people who
respond to requests for proposals as well as seek and follow-up on new sales
leads. Each of EE&G's professional staff members also has responsibility for
both establishing new business contacts and maintaining existing client
relationships through excellent customer service. EE&G's principals also play an
active marketing and customer service role. They have a combined thirty years of
experience and have developed a significant client base over their years in the
consulting business.
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Customers
EE&G maintains a diverse client base, consisting of both government and
private sector (non-governmental) clients. EE&G's private sector customers range
in size from Fortune 500 companies to small family run businesses. The customer
base is primarily within Florida, but EE&G's larger customers frequently provide
work throughout the Eastern United States and occasionally outside the United
States.
EE&G's governmental clients include a variety of federal government
agencies as well as state, county and city governments. In particular, EE&G is a
significant provider of asbestos consulting and testing services to school
systems throughout Florida.
For the Fiscal Year ended March 31, 1999, one of the Company's customers
represented nearly 11% of revenue but only 4% of the accounts receivable. Also,
the top ten customers of the Company combined comprised 51% of the total
revenues and 41% of the accounts receivable. For the fiscal year ended March 31,
1998, two of the Company's customers combined represented 11% of the Company's
revenues and 13% of the Company's accounts receivable.
Backlog
The majority of EE&G's work is done under multi-year, indefinite delivery
contracts. These contracts rarely guarantee a minimum quantity of work, except
as specified on any one work or purchase order issued under such a contract.
Most projects under individual work or purchase orders are completed within 90
days of issuance of the order to commence. Because of the above contractual
arrangements, EE&G recognizes very little backlog at any point in time.
Competition
EE&G operates in a highly competitive industry in which there are many
companies with greater resources and facilities and also numerous independent
operators that can collaborate with other companies to provide similar services.
EE&G has been successful in competing with both large and small organizations
and has maintained and/or expanded its practices despite the high level of
competition. EE&G derives a significant competitive advantage from a large
regional presence in Florida and its thirteen years of successful work in this
region.
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Government Regulation
The Company is subject to extensive and evolving government regulations
administered by various state and federal agencies and authorities. In many
respects, these regulations both govern the operation of the Company and
contribute to the demand for its services. Although the Company's customers
remain responsible by law for their environmental problems, the Company must
comply with the requirements of those laws applicable to its services. The
relevant laws and regulations that may affect the Company's operations include
the U.S. Environmental Protection Agency regulations and state regulations
regarding asbestos consulting, professional engineering, professional geology,
federal and state regulations governing the generation, treatment,
transportation and disposal of hazardous wastes, the clean-up of hazardous waste
sites and those governing workers in the workplace. Many of these areas are both
relatively new and rapidly developing and, therefore, the Company cannot predict
the extent to which the Company's operations may be affected by changes to
enforcement policies applied pursuant to current laws or by the enactment of new
environmental laws and regulations.
The Company's Florida operations are currently conducted under the
following protocols and maintain the following certifications and/or
accreditations:
o Florida Department of Business and Professional Regulation
("DBPR") licenses individuals who practice as asbestos consultants,
engineers, geologists and professional scientists.
o The National Institute of Standards and Technology's National Voluntary
Laboratory Accreditation Program ("NVLAP").
o Florida Department of Health & Rehabilitative Services ("HRS"). The
Company is an HRS certified laboratory for the analysis of asbestos in
drinking water and airborne radon.
Until the spring of 1995, the Company provided a number of environmental
consulting services, including the assessment and remediation of contaminated
sites related to discharges of petroleum products from petroleum storage systems
that are eligible for reimbursement of cleanup costs under the State of
Florida's Inland Protection Trust Fund program (the "FIPT"). The Company entered
into contracts from time to time with third parties for the purpose of funding
such remediation work, subject to payment of a markup or handling fee to such
funders. In the event the State of Florida were to determine that certain costs
are not reimbursable, such contracts generally provide that the Company is
required to bear all costs not reimbursed. There can be no assurance that the
State of Florida will fully reimburse costs submitted in the pending
applications for reimbursement of costs.
The State of Florida ceased the processing of applications for new work
under the Petroleum Contamination Reimbursement Program with the FIPT, with
limited exceptions, for certain active sites. In its place, the State of Florida
has implemented, under the FIPT, a prioritized Petroleum Cleanup Program based
upon pre-approved scope of work and costs.
The Company has claims submitted, as of March 31, 1999, totaling
approximately $179,000, net of reserves, under the FIPT's prior program. As of
March 31, 1999 the Company does not have any material claims remaining to be
submitted under the new program. The Company has no plans at this time for
future participation in this program.
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Intellectual Property Rights
The Company has no present patent application pending nor does it recognize
intellectual property as an asset on its balance sheet. The Company has sold
certain intellectual property as described in Item 1(b) - "The Asbestos
Practice"
Research and Development
For the fiscal year ended March 31, 1999, the Company did not expend any
significant funds on research and development activities
Environmental Considerations
While it does not generate or assume ownership of hazardous waste, the
Company does, through its laboratories and field services, handle potentially
hazardous substances as samples submitted for analysis. These samples are
disposed of under State-approved plans for the temporary storage, transport and
disposal of such materials. All hazardous waste is stored in appropriate drums
and packaged for shipping according to Federal Department of Transportation
regulations to an approved waste disposal site by an approved hazardous waste
hauler. The Company's costs of compliance with environmental laws and
regulations is approximately $5,000 per year, primarily for hazardous waste
disposal. See "Governmental Regulation" for a discussion of other environmental
laws and regulations to which the Company is subject and the effects of
compliance with such laws and regulations on the Company.
Seasonality
The Company's consulting revenue increases during the second quarter of
each fiscal year, due to the work done for school district clients. This is the
time of the year when schools are partly vacant and most asbestos remediation
work is scheduled. Other than this item, there is no seasonality with respect to
the Company's business.
Sources and Availability of Raw Materials
The raw materials, including the products used by the Company are believed
by the Company to be in wide supply and available from a number of sources.
Inflation
Management believes that inflation does not materially affect the
operations of the Company.
Employees
As of March 31, 1999, the Company employed 45 full time employees. No
employees are members of a collective bargaining unit under a union
representation contract. Management believes its relations with its employees
are good.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company owns no real property. The Company leases 11,888 square feet
for its Miami laboratory facility and operating offices. The Company maintains
offices throughout Florida, the combined costs of these leases are approximately
$245,000 annually. The Company would not be materially adversely affected if it
were necessary to relocate any of its offices. In fact, Management believes it
will substantially reduce its lease costs when the Miami lease expires in
January of 2000. The Company believes that its facilities are more than adequate
for its current operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in a legal proceeding, seeking an unspecified
amount of damages, regarding the failure to disclose the existence of
underground tanks. The properties were not alleged to have been contaminated.
The Company and its legal counsel believe the claim is without merit and have
vigorously contested the matter. The accompanying financial statements do not
reflect any adjustments for this uncertainty.
The Company is also the subject of a lawsuit alleging breach of contract on
behalf of the Company. The Company believes it has adequate legal defenses with
respect to the action and has and will continue to vigorously defend against the
action. However, it is reasonably possible that this action could result in an
outcome unfavorable to the Company. While the Company currently believes that
the amount of the ultimate potential loss would not be material to the Company's
financial position, the outcome of this action is inherently difficult to
predict. In the event of an adverse outcome, the ultimate potential loss could
have a material adverse effect on the Company's financial position or reported
results of operations. Management has provided a reserve of $100,000 for this
uncertainty.
The Company is exposed to various asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial position or the results of its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended March 31, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the Over the Counter Bulletin Board of
the National Association of Securities Dealers Automated Quotation System
(NASDAQ) under the symbol ECOS. The Company's shares were delisted from the
NASDAQ SmallCap marketplace effective January 2, 1998. The quotations set forth
below are inter-dealer quotations obtained from NASDAQ, do not reflect retail
mark-ups, mark-downs or commissions, and do not necessarily represent actual
transactions. The Company's Common Stock also began trading under the symbol EVE
April 20, 1995 on the Freiverhehr (over-the-counter market) of the Berlin Stock
Exchange, Berlin, Germany and under the same symbol in 1997 on the Frankfurter
Wertpaperborse (over-the-counter market) of the Frankfurt Stock Exchange in
Frankfurt, Germany.
The Company had 347 shareholders of record as of June 30, 1999 and believes
there are approximately 1,100 additional beneficial holders of its securities
who hold such shares in "street" or nominee name.
Quarter Ended High Bid Low Bid
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Fiscal 1999:
March 31, 1999 $0.0469 $0.0312
December 31, 1998 $0.0469 $0.0156
September 30, 1998 $0.1250 $0.0156
June 30, 1998 $0.1562 $0.0781
Fiscal 1998:
March 31, 1998 $0.1250 $0.1250
December 31, 1997 $0.4250 $0.1500
September 30, 1997 $0.3250 $0.2250
June 30, 1997 $0.5625 $0.3250
Dividends
The Company has not declared or paid any cash dividends on its Common
Stock, and presently has no plans to do so.
The Company's current policy is to retain all earnings, if any, for
business use. The payment of cash dividends, if any, will be at the discretion
of the Board of Directors and will depend upon earnings, financial requirements
of the Company and such other factors as the Board of Directors may deem
relevant. Payment of dividends on Common Stock is subject to prior payment of
accrued and unpaid dividends on outstanding shares of Preferred Stock.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Introduction
Through fiscal year 1997 and into fiscal year 1998, ART showed significant
operating losses. Management's plan to generate profits within ART was to
develop a system to process biosolids with the waste heat from the thermal
treatment process.
During Fiscal 1998, management borrowed $500,000 from a private lender as a
bridge loan until the Company could complete a contemplated equity offering to
raise $2,000,000. This $2,000,000 was to fund the continued operation of ART
pending the approval of a biosolids processing permit and the ramp-up period to
operating at full capacity. In late August of 1997, the Company received notice
that the biosolids permit would not be considered until January 1998, and the
Company was unable to successfully complete the anticipated equity offering. The
result of the above left the Company unable to fulfill its obligations to its
lender, consequently the lender declared the Company in default under the terms
of the loans and foreclosed on the collateral.
The above described actions led the Board of Directors to discontinue
acceptance of contaminated soil at the ART facility and to begin burning off the
inventory. The Board further instructed Management to explore any and all means
to minimize the financial damage to the Company from the loss of ART. The
results of Management's efforts were the forfeiture of the thermal remediation
plant at the Port of Los Angeles to satisfy the note secured by that equipment,
the forfeiture of the stock in ART to satisfy the note secured by that stock,
the conversion of a note for $464,000 plus accrued interest to equity, and the
retention of $608,000 in debt by the Company with the receivables of EE&G as
security for this new note.
In September 1997, Mr. David Langle, the Chief Financial Officer (CFO),
resigned. Mr. Langle was replaced by Mr. Michael Baker, formerly a Vice
President of the Company. In February of 1998, Enrique Tomeu, the CEO of ECOS
Group, Inc. took a leave of absence from the Company. Mr. Tomeu was replaced by
Dr. Charles Evans, the Company's Chairman, as Interim CEO. In June 1998, Dr.
Evans accepted a one-year contract to serve as the Chief Executive Officer of
the Company. In July 1998, Mr. Baker resigned and no replacement CFO was
appointed until March of 1999, when Ms. Ana Caminas became the Company's CFO.
Fiscal 99 Compared to Fiscal 98
During the fiscal year ended March 31, 1999 ("Fiscal 99"), the Company
ended with Net Income of $320,770, as compared to a loss of $9,155,369 for the
fiscal year ended March 31, 1998 ("Fiscal 98").
During Fiscal 99, The Company's new management, continued the cost saving
actions which were started during Fiscal 98, including significant labor
reductions, restructuring of under-performing consulting offices, closing of
unprofitable consulting offices, reductions of corporate overhead and other
measures. The results of these cost saving measures contributed to the Company's
return to profitability during Fiscal 99. Management believes that the Company
can experience sustained and profitable revenue growth in the future, although
no assurances can be given.
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The Company has broadened its service areas offered to clients by the
addition of several new senior professionals to the existing management staff of
its subsidiary, EE&G, and realigning it's organizational structure from an
office based to a practice based structure. This realignment has increased
cooperation among EE&G's operating areas and improved the ability to market all
aspects of EE&G to clients.
The Company's revenues decreased marginally from $4,846,819 for Fiscal 98
to $4,814,116 for Fiscal 99, a decrease of $32,703 or approximately 0.7%. Direct
costs were $2,853,989 for Fiscal 99 versus $2,780,068 for Fiscal 98 representing
an increase of $73,921 or approximately 2.7%. The Company's gross margin reduced
from 42.6% in Fiscal 98 to 40.7% in Fiscal 97.
Reflective of the Company's cost saving actions, Other Costs and Expenses
decreased $1,089,439 or 34% to $2,128,985 for Fiscal 99 compared to $3,218,424
for Fiscal 98. Included in the Fiscal 99 expenses is an expense for the issuance
of Stock compensation for Directors, Management and employees amounting to
$351,065. Excluding this one-time item, Fiscal 1999 expenses were nearly cut in
half when compared to Fiscal 1998 due to the cost saving actions which were
started during Fiscal 98.
The operating loss for Fiscal 99 was $168,858 a decrease of $982,815 or 85%
from the Fiscal 98 operating loss of $1,151,673. Excluding the expense for Stock
compensation, an operating income of $182,207 would have resulted in Fiscal 99.
On November 12, 1998, the Company executed a Settlement Agreement for a
claim payable to one of its attorneys. As a result, the Company recorded a gain,
net of expenses, of $230,000, during Fiscal 1999, Additionally, On November 17,
1998, a mutual agreement was reached between the Company and its then Chief
Executive Officer to terminate their four-year employment contract dated July 8,
1996. In exchange for the termination, the Officer agreed to release the Company
from a $354,337 obligation payable to the Officer in the form of a note payable
as well as surrender 633,365 shares of Series B Convertible Preferred Stock of
the Company. As a result, the Company recorded a gain of $354,337 during Fiscal
1999. Conversely, Fiscal 1998 reflects two large one-time other expenses: the
Disposal of Marketable Securities resulted in a loss of $150,000, and Disposal
of Fixed assets resulted in a loss of $336,938.
The aforementioned one-time items further contributed to the
improvement in the income from continuing operations of $320,770 for Fiscal 99.
This was $1,997,358 better than the $1,676,588 loss for Fiscal 98 and can be
summarized as follows:
<TABLE>
<CAPTION>
Fiscal 99 Fiscal 98
---------- ----------
<S> <C> <C>
Income from consulting offices $1,960,127 $ 2,066,751
Corporate overhead (2,128,985) (3,218,424)
Other Income (expense) 489,628 (524,915)
---------- -----------
Loss before income taxes and discontinued operations $ 320,770 ($1,676,588)
---------- -----------
</TABLE>
Net Income for Fiscal 99 was $320,770 compared to a $9,155,369 loss for
Fiscal 98. The loss for Fiscal 98 includes a loss from disposal and discontinued
operations of ART amounting to $7,478,781.
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Liquidity and Capital Resources
The Company had a working capital deficit of $1,175,356 at March 31, 1999,
compared with a working capital deficit of $1,467,483 at March 31, 1998. This
decrease in deficit of $292,127 reflects a working capital ratio of .50 at March
31, 1999 from .44 at March 31, 1998.
Net cash increased during Fiscal 99 by $21,775 compared to a decrease
during Fiscal 98 of $380,880. Cash provided by continuing operations was
$190,332 compared to cash used of $86,992 in Fiscal 98. Decrease in notes
receivable during Fiscal 98 provided $266,122. There were no other significant
investing activities in either year. The net cash used in financing activities
of $ 151,629 in Fiscal 99 and $161,931 in Fiscal 98 resulted primarily from the
Company's paydown of past obligations.
The Company entered into subcontractor finance agreements totaling $518,716
during fiscal years 1998 and 1997, eligible for reimbursement under the FIPT.
Under these agreements, the Company must prepay interest for 12 months based on
the published prime rate at the time of funding. Also, at the time of funding
the Company must prepay additional interest at a rate of 5% to a reserve account
for months 13 through 18. If reimbursement from the FIPT takes more than 18
months, then interest must be prepaid on a quarterly basis at the rate of prime
plus 3%. The Company is liable to the financing companies for any reimbursement
denials. The Company must pay any denied reimbursements within 10 days of
notification. As of March 31, 1999, the Company had outstanding balances of
$251,077.
The Company continues to monitor the recent governmental activities in
Florida with respect to changes in the FIPT, see Item 1. Description of Business
- - Governmental Regulation, above. As of March 31, 1999, the Company had claims
submitted to the FIPT totaling $179,008, net of reserves.
The Company intends to fund its current operations from a combination of
cash on hand, cash generated from operations, potential new equity or a sale of
assets. These sources of capital are expected to fund the Company's current
operations through March 31, 2000. Management believes that the Company can
experience sustained and profitable revenue growth in the future, although no
assurances can be given. However, if the Company does not continue its
profitability, or absent alternative sources of financing, there would be a
material adverse effect on the financial condition, operations and business
prospects of the Company. The Company has no arrangements in place for
alternative sources of financing, and no assurance can be given that such
financing will be available at all or on terms acceptable to the Company.
ITEM 7. FINANCIAL STATEMENTS.
The Company's audited consolidated financial statements immediately follow
the signature page to this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
13
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company as of June 30, 1999 are
as follows:
<TABLE>
<CAPTION>
In Office
Name Age Position(s) Since
---- --- ---------- ---------
<S> <C> <C> <C>
Wendell R. Anderson 66 Director 1994
Luis De la Cruz 46 Director 1996
Leon S. Eplan 70 Director 1993
Dr. Charles C. Evans 42 Chairman of the Board of Directors 1993
Interim Chief Executive Officer 1998
Chief Executive Officer 1998
Joseph F. Startari 51 Director 1996
</TABLE>
Business Experience:
Wendell R. Anderson was appointed to the Board in 1994. He has been Of
Counsel to the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd., based in
Minnesota, since 1979. He also serves as a director of the following public
companies: Fingerhut Corp. (since 1991), National City Bank Corporation (since
1981) and Turbodyne Technologies, Inc. (since 1996).
Luis De la Cruz has been president and shareholder of De la Cruz & Cutler,
P.A., a law firm in Coral Gables, Florida since 1990 . His principal areas of
practice are real estate and commercial transactions. He has a BS degree in
civil engineering and a JD degree from the University of Florida.
Leon S. Eplan, who has been a member of the Board since April, 1993, heads
Eplan Consulting, an Atlanta based firm providing client services in urban
planning and revitalization, urban economic analysis, real estate development,
and growth management. Mr. Eplan serves on the Audit Committee of the Board of
Directors. In addition, he was formerly the Commissioner of Planning and
Development of the City of Atlanta, where, among other duties, he was
responsible for developing the program that guided the city's preparations for
the 1996 Summer Olympic Games. He has also served as Director of the Graduate
City Planning Program at the Georgia Institute of Technology.
Dr. Charles C. Evans joined the Company as Chairman of the Board of
Directors in January 1993. Until March 1995, Dr. Evans served as the President
and Chief Executive Officer of the Company, and also as the President of Evans
Environmental. Since 1986 and until March 1995, Dr. Evans had been continuously
employed as President of one or more of Evans Environmental's subsidiaries. In
February of 1998, Dr. Evans was appointed interim Chief Executive Officer of the
Company, and in June of 1998, was appointed to Chief Executive Officer under a
one year agreement.
14
<PAGE>
Joseph F. Startari is president, Chief Executive Officer and Chairman of
Biotechna Environmental Technologies Corporation, an environmental/biotechnology
company, and president and Chief Executive Officer of Biotechna USA, Inc. a
majority owned subsidiary. Mr. Startari joined the Biotechna group in December
of 1995. Biotechna Environmental Technologies Corporation is a publicly owned
reporting issuer in Alberta, Canada which does not trade publicly. Prior to
joining Biotechna Mr. Startari worked a variety of positions for Olin
Corporation from June of 1978 through December of 1995 in its Ordinance
Division, a defense contractor. Mr. Startari was Vice President - Recovery
Systems and Executive Vice President Olin Services, Inc. at the time he left
Olin.
Directors are elected annually at the Company's annual shareholders'
meeting. Each director of the Company serves until his successor is elected and
qualified or until the earlier of death, resignation, removal or
disqualification of the director. The officers are elected annually by the
directors.
Committees of the Board of Directors
The Board of Directors has established a Compensation Committee, of which
Mr. Luis de la Cruz, Chairman, Mr. Wendell Anderson and Dr. Charles Evans are
members. The functions of the Compensation Committee are to review and approve
annual salaries and bonuses for all executive officers and review, approve and
recommend to the Board of Directors the terms and conditions of all employee
benefit plans or changes thereto, including the granting of stock options
pursuant to the Company's stock option plans.
The Board of Directors has also established an Audit Committee of which Mr.
Joseph F. Startari, Chairman, Mr. Leon Eplan and Dr. Charles Evans are members.
The functions of the Audit Committee are to oversee the Company's Chief
Financial Officer, meet periodically with the Company's outside auditors, and
generally be responsible for the Company's financial and accounting policies.
Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who beneficially own more than
10% of the Company's Common Stock, to file reports of securities ownership and
changes in such ownership with the Securities and Exchange Commission (the
"SEC"). Officers, directors and greater than 10% beneficial owners also are
required by rules promulgated by the SEC to furnish the Company with copies of
all Section 16(a) forms they file. Based solely upon a review of the copies of
such forms furnished to the Company and written representations that no other
reports were required, the Company believes that, for the fiscal year ended
March 31, 1999, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information about the compensation paid or
accrued by the Company during the fiscal years ended March 31, 1999 and March
31, 1998 for employees whose aggregate compensation exceeded $100,000 for either
of the two fiscal years.
15
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
------------------------------------ --------------------------------
Securities
Name and Restricted Underlying
Principal Position Year Salary Bonus Stock Award $ Options
------------------ ---- -------- ------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Charles Evans 1999 $ 92,708 $111,927 300,000*
Chairman and Chief
Executive Officer
Timothy Gipe 1999 $ 95,042 $35,155 $102,939 500,000*
President
Enrique A. Tomeu, 1998 $ 66,730
President and Chief
Executive Officer
Enrique A. Tomeu, 1997 $102,800
President and Chief
Executive Officer
TOTAL $214,866 800,000
</TABLE>
- -----------------
* For a description of the options granted in Fiscal 1999 see "Options" below.
Options
In March, 1999, the Board of Directors awarded common stock and warrants to
Messers. Charles Evans and Timothy Gipe for past due unpaid compensation
aggregating $214,866. In June, 1999, the Company issued 2,869,923 and 2,639,462
shares of common stock to Messers. Evans and Gipe, respectively. A combined
compensation expense of $214,866 was recognized in the year ended March 31,
1999. An equal number of warrants to purchase common stock of the Corporation at
110% of the market price (ten days after the Company becomes current with its
SEC filings) were issued to the same officers. Additionally, during Fiscal 1999,
Messers. Evans and Gipe were granted 300,000 and 500,000 stock options,
respectively; each of which is, (i) for 3 years, (ii) immediately exercisable,
(iii) at an exercise price of $0.10 per share (the market price on the date of
the grant).
Compensation Arrangements
Employment Agreement
Enrique A. Tomeu was employed as the Chief Executive Officer and President
of the Company pursuant to a four year employment agreement dated as of July 8,
1996. As compensation thereunder, Mr. Tomeu was entitled to receive an annual
salary of $150,000; a luxury automobile; a $900 per month non-accountable
expense allowance; an expense account for business travel and other expenses;
six weeks paid vacation annually; health insurance for himself and his family;
and a $3,000,000 life insurance policy on his life payable to his designees. In
addition, Mr. Tomeu could have been entitled to a bonus based on the performance
of the Company, at the discretion of the Board of Directors. Upon termination of
his employment with the Company by virtue of his involuntary resignation,
permanent disability (as defined in the agreement) or dismissal for other than
cause (as defined in the agreement), Mr. Tomeu would have been entitled to
convert any Series B Convertible Preferred Stock, which he then may have owned,
to Common Stock as though the applicable earnouts had been earned. As a part of
his employment agreement, Mr. Tomeu has agreed not to compete with the Company's
business for a period of one year following his voluntary resignation or the
termination of his employment for cause.
16
<PAGE>
On November 17, 1998, a mutual agreement was reached between the Company
and Mr. Tomeu to terminate their four-year employment contract dated July 8,
1996. In exchange for the termination, the Officer agreed to release the Company
from a $354,337 obligation payable to the Officer in the form of a note payable
as well as surrender 633,365 shares of Series B Convertible Preferred Stock of
the Company. As a result, the Company recorded a gain of $354,337 during the
year ended March 31, 1999. These shares are currently being held by EE&G, the
Company's subsidiary.
On July 3, 1996, Dr. Evans, Chairman of the Board was employed by the
Company pursuant to a new three-year employment agreement and a new three-year
consulting agreement. The new employment agreement provides for an annual salary
of $24,000; a $500 auto allowance; an expense account for business travel and
other expenses; and eight weeks paid vacation annually. The consulting agreement
provides for annual fees of $50,000 and an expense account for business travel
and other expenses. In addition, Dr. Evans may be entitled to a bonus at the
discretion of the Board of Directors based on the performance of the Company.
Dr. Evans has agreed not to compete with the Company's business for a period of
one-year following his voluntary resignation or the termination of his
employment with the Company for cause.
In June, 1998, Dr. Evans' existing agreements were deferred in lieu of a
one year agreement to serve as Chief Executive Officer of the Company. Pursuant
to this agreement, Dr. Evans is to receive a salary of $100,000 per year, a car
allowance of $600 per month, a performance based bonus of up to $15,000 per
year, reimbursement for business travel and expenses and eight weeks paid
vacation per year.
Compensation of Directors
Each director who is not an executive officer or employee of the Company is
entitled to a fee of $300 per meeting. Further, for serving on the Board of
Directors, directors received mandatory stock option grants under the 1993 Stock
Option Plan and are entitled to additional compensation duly authorized by the
Board of Directors. In March, 1999, the Board of Directors voted to award common
stock and warrants for past due unpaid compensation. In June, 1999, the Company
issued 1,276,923 shares of common stock for the directors. A compensation
expense of $49,800 was recognized in the year ended March 31, 1999.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Principal Shareholders
The following table sets forth certain information, as of June 30, 1999,
regarding the Company's Common Stock owned of record or beneficially by (i) each
stockholder who is known by the Company to beneficially own in excess of 5% of
the outstanding shares of Common Stock, (ii) each director and executive officer
and (iii) all directors and executive officers as a group. Except as otherwise
indicated, each stockholder listed below has sole voting and investment power
with respect to shares beneficially owned by such person.
In accordance with Rule 13d-3, promulgated under the Exchange Act, shares
that are not outstanding but that are issuable upon exercise of outstanding
options, warrants, rights or conversion privileges have been deemed to be
outstanding for the purpose of computing the percentage of outstanding shares
owned by the person owning such right, but have not been deemed outstanding
17
<PAGE>
for the purpose of computing the percentage for any other person. As of June 30,
1999, there were 29,418,334 shares of Common Stock issued and outstanding.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
----------------------------- ---------------------------
Amount and Nature of Amount and Nature
Beneficial % of of Beneficial % of
Name and Address Ownership Class Ownership Class
---------------- -------------------- ----- ----------------- -----
<S> <C> <C> <C> <C>
Enrique A. Tomeu (1) 1,900,000 4.82% -- --
1000 Southern Blvd., Ste 300
West Palm Beach, Florida 33405
Strategica Capital Corporation (2)
1221 Brickell Avenue, Ste 2600 2,460,193 6.25% -- --
Miami, Florida 33131
Charles C. Evans (3) 6,489,846 16.47% -- --
99 S.E. 5th St., 4th Floor
Miami, Florida 33131
Timothy Gipe (4) 5,778,924 14.67% -- --
99 S.E. 5th St. 4th Floor
Miami, Florida 33131
All Directors, Executive Officers
and nominees as a Group 15,022,616 38.14% -- --
(6 persons) (5)
</TABLE>
- ---------------
(1) Does not include 122,277 shares of Common Stock owned of record by Mr.
Tomeu's mother as to which shares Mr. Tomeu disclaims beneficial
ownership.
(2) Includes (i) 175,000 shares of Common Stock issuable under currently
exercisable warrants granted to a predecessor corporation and (ii)
761,731 shares of Series A Convertible Preferred Stock issuable under
currently exercisable warrants. The shares of Series A Convertible
Preferred Stock are convertible into 2,285,193 shares of Common Stock.
(3) Includes options to purchase 300,000 shares of Common Stock, 2,869,923
common stock issued in June 1999 and 2,869,923 currently exercisable
warrants.
(4) Includes options to purchase 500,000 shares of Common Stock, 2,639,462
common stock issued in June 1999 and 2,639,462 currently exercisable
warrants.
(5) Includes options to purchase 1,000,000 shares of Common Stock and
6,786,308 currently exercisable warrants.
18
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In July, 1995, the Company borrowed $85,000 from the spouse of the
Chairman of the Board of Directors. The note is due upon demand and bears
interest at 12% per annum. The Chairman disclaims any beneficial interest in the
loan. The balance of this note is $15,000 at March 31, 1999.
On December 31, 1996 the Company borrowed $1,000,000 from a
shareholder/director of the Company pursuant to a one year promissory note
bearing interest at 14% per annum. For the first three months of the note, while
the Company sought alternative long-term financing, the note was unsecured with
interest only payable monthly. Commencing March, 1997, monthly payments of
principal and interest were required until maturity in December, 1997, and the
note was secured by all trade accounts receivable of the Company. This note was
repaid on May 5, 1997 from proceeds of a $1,000,000 loan received from the
father of the shareholder. This latter note was modified to a three month
promissory note maturing on August 5, 1997, with monthly interest only payable
at 12% per annum. The note was secured by all trade receivables of the Company.
On September 23, 1997, the Company received a notice of its default on this note
for nonpayment of principal and interest. The Company settled its default on
this note for nonpayment of principal and interest, by delivering a $608,000
promissory note dated October 29, 1997 in favor of the shareholder's father,
bearing interest at 12% per annum with quarterly principal and interest payments
of $40,867, and agreeing to issue 2,666,667 shares of the Company's Common
Stock. The new note and the agreement to issue stock extinguishes the $1,000,000
promissory note dated May 5, 1997. The balance of this note is $487,869 at March
31, 1999.
In June 1996, ART acquired a used thermal desorption plant located at the
Port of Los Angeles for a purchase price of $600,000. This equipment was
acquired on behalf of the company by Mr. Sam Klein, the father of one of the
company's directors and shareholders, pursuant to a demand note for $515,000
bearing interest at 12% per annum. This note was secured by the acquired plant.
The outstanding balance as of March 31, 1997 was $515,000. On September 23, 1997
the note was declared in default for nonpayment of principal and interest. The
obligations of this note were assumed by the acquirer of ART.
In May, 1997, the Company borrowed $72,000 from the mother of a former
director and shareholder of the Company. The loan is due upon demand and bears
interest at 12% per annum. The balance of this loan is $72,000 at March 31,
1999.
During 1997, the Company's remediation division had a note payable to an
affiliated company under common ownership of the Company's chief executive
officer for $303,000 with a 13.5% interest rate. On November 17, 1998 a mutual
agreement was reached between the Company and its Chief Executive officer to
terminate their four-year employment contract dated July 8, 1996. In exchange
for termination of the employment contract, the Officer agreed to release the
company from $354,337 obligation payable to the Officer in the form of a note
payable as well as surrender 633,365 shares of Series B Convertible Preferred
Stock of the Company. These shares are currently being held by EE&G, the
Company's subsidiary.
On June 18, 1997, ART obtained a $500,000 promissory note from Sam Klein to
fund its continuing operations. This note, bearing interest at 12% per annum,
was due on June 18, 1998. The note was secured by all of the Common Stock of ART
and was required to be repaid from expected proceeds from a $2,200,000
convertible equity offering the Company was pursuing. The convertible equity
offering never materialized. On September 23, 1997 ART was notified that this
$500,000 note was in default for nonpayment of interest., Sam Klein sold the
note to a third
19
<PAGE>
party. In settlement of all amounts owed under the note, the Company transferred
all the common stock of ART to the holder of the note, thereby effectively
disposing of ART and extinguishing the obligation.
On October 23, 1997, the Company disposed of American Remedial
Technologies, Inc. ("ART") by transferring all of the Common Stock of ART to
Messrs. Mark Patton, Fred Miller and Joe Torres Jr., the holders of a $500,000
promissory note receivable from ART, in complete satisfaction of the debt. The
Company originally purchased ART for $7,500,000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Restated Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3(i) of Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1995, dated August 21, 1995.
3.2 Bylaws. incorporated by reference from Exhibit 3(ii) of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995,
dated August 21, 1995.
4.1 Warrant Agreement dated July 11, 1994 between the Company and
Strategica Group, Inc. incorporated by reference from Exhibit 4.1 of
Registrant's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1995 dated February 12, 1996.
4.2 Warrant Agreement dated July 11, 1994 between the Company and
Strategica Capital Corporation incorporated by reference from Exhibit
4.1 of Registrant's Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1995 dated February 12, 1996.
4.3 Warrant Agreement dated April 4, 1995 between the Company and
Strategica Capital Corporation incorporated by reference from Exhibit
4.1 of Registrant's Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1995 dated February 12, 1996.
4.4 Additional Warrant Agreement dated April 4, 1995 between the Company
and Strategica Capital Corporation incorporated by reference from
Exhibit 4.1 of Registrant's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1995 dated February 12, 1996.
4.5 Amendment to Warrant Agreement between the Company and Strategica
Capital Corporation dated April 4, 1995 incorporated by reference from
Exhibit 4.1 of Registrant's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1995 dated February 12, 1996.
4.6 Amendment to Warrant Agreement between the Company and Strategica
Group, Inc. dated April 4, 1995 incorporated by reference from Exhibit
4.1 of Registrant's Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1995 dated February 12, 1996.
4.7 Warrant Agreement dated July 8, 1996 between the Company and Clubb
Capital Ltd. incorporated by reference from Exhibit 4.7 of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996,
dated July 15, 1996.
20
<PAGE>
4.8 Warrant Agreement dated July 8, 1996 between the Company and Karl
Spoddig. incorporated by reference from Exhibit 4.8 of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996,
dated July 15, 1996.
Items 10.1, 10.2, 10.3, and 10.4 are the Company's executive compensation plans
and arrangements.
10.1 Employment Agreement between Evans Environmental Corporation and
Charles Evans dated June 26, 1992 incorporated by reference from
Exhibit 10.19 of Registrant's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1993 dated July 14, 1993.
10.3 Evans Environmental Corporation 1993 Stock Option Plan incorporated by
reference from Exhibit 10.3 of Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1995 dated August 18, 1995.
10.8 Advisory Agreement between the Company and Strategica Group, Inc. dated
June 16, 1994 incorporated by reference from Exhibit 10.8 of the
Registrant's Form SB-2, No. 33-85072, dated October 13, 1994.
10.10 Credit Agreement, dated as of July 11, 1994 incorporated by reference
from Exhibit 10.4 of the Registrant's Form 10-KSB for the fiscal year
ended March 31, 1994, dated July 14, 1994.
10.11 Amendment to Advisory Agreement between the Company and Strategica
Group, Inc. dated April 4, 1995 incorporated by reference from Exhibit
10.12 of Registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1995 dated August 18, 1995.
10.13 Stock Sale Agreement between the Company and Enrique A. Tomeu dated
March 15, 1996, as amended, incorporated by reference from Exhibit
10.13 of Registrant's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1996, dated July 15, 1996.
10.14 Agency Agreement between the Company and Clubb Capital Ltd dated July
8, 1996, incorporated by reference from Exhibit 10.14 of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996,
dated July 15, 1996.
10.15 Asset Purchase Agreement between the Company, ABC Cable Products, Inc.
and ICX International, Inc. dated April 3, 1996, incorporated by
reference from Exhibit 10.15 of Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1996, dated July 15, 1996.
10.16 Promissory Note between the Company and Lisa L. Robbins dated May 1,
1995, incorporated by reference from Exhibit 10.16 of Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996,
dated July 15, 1996.
10.17 Corporate Relations Agreement, dated August 13, 1996, between the
Company and Corporate Relations Group, Inc, incorporated by reference
from Exhibit 10.2 of the Registrant's Registration Statement on Form
S-3, dated October 11, 1996.
21
<PAGE>
10.18 The Company's 1996 Stock Option Plan, incorporated by reference from
the Company's Proxy Statement for the Annual Meeting of Shareholders
held on October 18, 1996.
(b) Reports on Form 8-K
<TABLE>
<S> <C>
May 18, 1998 Change in registrant's Certifying Accountant
May 28, 1998 Amended report of change in registrant's Certifying Accountant
June 19, 1998 Resignation of Mr. Michael Klein from the Board of Directors and Mr. Michael
Baker, as interim Chief Financial Officer.
November 12, 1998 Change in registrant's Certifying Accountant
May 19, 1999 Amended report of change in registrant's Certifying Accountant
</TABLE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ECOS Group, Inc.
By:
-------------------------------------
Ana Caminas
Chief Financial Officer
Date: July 14, 1999
In accordance with the requirements of the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Charles Evans Director July 14, 1999
- -----------------------------
Dr. Charles C. Evans
/s/ Wendell Anderson Director July 14, 1999
- -----------------------------
Wendell Anderson
/s/ Leon Eplan Director July 14, 1999
- ----------------------------
Leon S. Eplan
/s/ Luis De la Cruz Director July 14, 1999
- ----------------------------
Luis De la Cruz
/s/ Joseph Startari Director July 14, 1999
- ----------------------------
Joseph F. Startari
</TABLE>
22
<PAGE>
ECOS GROUP, INC.
----------------
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
as of March 31, 1999
and for the years ended March 31, 1999 and 1998
ECOS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Independent Auditor's Report F-1
Financial Statements:
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4 to F-5
Consolidated Statements of Stockholders'
Equity (Deficit) F-6
Notes to Consolidated Financial Statements F-7 to F-27
23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Ecos Group, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Ecos Group, Inc.
and Subsidiary as of March 31, 1999, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
March 31, 1999 and 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ecos Group, Inc. and
Subsidiary as of March 31, 1999, and the results of their operations and their
cash flows for the years ended March 31, 1999 and 1998 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As described in Note 3 to the
consolidated financial statements, the Company has experienced operating losses
resulting in a deficit equity position. At March 31, 1999, the Company's current
liabilities exceeded their current assets by approximately $1,200,000. Future
working capital requirements are dependent on the Company's ability to restore
and maintain profitable operations. Management's plans in regard to these
matters are described in Note 3. The Company's ability to achieve the foregoing
elements of its business plan, which may be necessary to permit the realization
of assets and satisfaction of liabilities in the ordinary course of business, is
uncertain. Those conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MORRISON, BROWN, ARGIZ & COMPANY
Certified Public Accountants
Miami, Florida
June 22, 1999
F-1
<PAGE>
ECOS GROUP, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents (Note 2) $ 90,677
Accounts receivable, net of $152,151 allowance 999,197
Notes receivable (Note 17) --
Prepaid expenses & other assets 66,922
------------
TOTAL CURRENT ASSETS 1,156,796
Amounts due under state reimbursement program (Note 5) 179,008
Property and equipment, net (Notes 2, 6) 41,410
Goodwill, net of $284,416 accumulated amortization (Note 2) 305,537
------------
TOTAL ASSETS $ 1,682,751
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,041,025
Accrued expenses (Note 7) 830,309
Current portion of related party notes payable (Note 10) 196,741
Notes payable (Note 8) 264,077
------------
TOTAL CURRENT LIABILITIES 2,332,152
Long-term debt - related party notes payable, less current portion (Note 10) 378,128
------------
Commitments and contingencies
STOCKHOLDERS' DEFICIT (Note 12)
Preferred stock ($.75 liquidation value):
Series A; $.001 par value, 5,000,000 authorized,
None issued and outstanding
Series B convertible; $.001 par value,
1,000,000 authorized, issued and outstanding 1,000
Common stock, $.012 par value; 75,000,000 authorized,
20,266,693 issued and outstanding 243,199
Additional paid in capital 16,592,898
Accumulated deficit (17,864,626)
------------
TOTAL STOCKHOLDERS' DEFICIT (1,027,529)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,682,751
============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUE
Consulting services $ 4,814,116 $ 4,846,819
----------- -----------
COSTS OF CONSULTING SERVICES
Subcontractor expenses 1,127,624 995,099
Other direct costs and expenses 1,726,365 1,784,969
----------- -----------
TOTAL DIRECT COSTS AND EXPENSES 2,853,989 2,780,068
----------- -----------
GROSS PROFIT 1,960,127 2,066,751
----------- -----------
OTHER COSTS AND EXPENSES
General, administrative and other operating costs 1,777,920 3,218,424
Stock compensation for services 351,065 --
----------- -----------
TOTAL OTHER COSTS AND EXPENSES 2,128,985 3,218,424
----------- -----------
OPERATING LOSS (168,858) (1,151,673)
----------- -----------
OTHER INCOME (EXPENSE)
Interest, net (45,691) (131,243)
Accounts payable settlements 240,607 --
Loss on disposal of marketable securities -- (150,000)
Gain on sale of laboratory assets -- 40,000
Loss on disposal of fixed assets -- (336,938)
Forgiveness of debt 354,337 --
Other income (expense), net (59,625) 53,266
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 489,628 (524,915)
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 320,770 (1,676,588)
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of $0 taxes -- (666,240)
Loss on disposal, net of $0 taxes -- (6,812,541)
----------- -----------
NET INCOME (LOSS) $ 320,770 $(9,155,369)
=========== ===========
BASIC INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ .016 $ (0.09)
----------- -----------
Discontinued operations $ -- $ (0.40)
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE $ .016 $ (0.49)
=========== ===========
DILUTED EARNINGS PER COMMON SHARE
Continuing operations $ .009 $ (0.09)
----------- -----------
Discontinued operations $ -- $ (0.40)
----------- -----------
NET INCOME (LOSS) PER DILUTED COMMON SHARE $ .009 $ (0.49)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31,
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 320,770 $(9,155,369)
--------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation & amortization 87,087 601,924
Accounts payable settlements (240,607) --
Loss on disposal of marketable securities -- 150,000
Gain on sale of laboratory assets -- (40,000)
Loss on disposal of fixed assets -- 336,938
Forgiveness of debt (354,337) --
Increase (decrease) in provision for bad debts and potential loss on
state reimbursement program 73,038 (146,393)
Loss from discontinued operations -- 314,364
Write down of net assets of discontinued operations -- 6,757,313
Changes in operating assets & liabilities, net of effects from purchase of
American Remedial Technologies, Inc.:
Accounts receivable (18,962) 9,497
Prepaid expenses & other (12,803) 67,196
Amounts due under state reimbursement program -- 17,143
Accounts payable and accrued expenses 336,146 495,731
Increase in related party notes -- 97,560
--------- -----------
Total adjustments (130,438) 8,661,273
--------- -----------
Net cash provided by (used in) operating activities of:
Continuing operations 190,332 (86,992)
Discontinued operations -- (407,104)
--------- -----------
Net cash provided by (used in) operating activities 190,332 (494,096)
--------- -----------
Investing activities:
Restricted cash -- 9,080
Decrease in notes receivable -- 266,122
Purchases of equipment (16,928) (11,573)
Proceeds from sale of equipment -- 11,518
--------- -----------
Net cash provided by (used in) investing activities (16,928) 275,147
--------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended March 31,
<TABLE>
<CAPTION>
1999 1998
--------- ------------
<S> <C> <C>
Financing activities:
Proceeds from exercise of warrants/options -- 697
Proceeds from notes payable 22,000 --
Proceeds from related party notes payable -- 1,144,000
Payments on notes payable (41,125) (259,000)
Payments on related party notes payable (132,504) (1,047,628)
--------- -----------
Net cash used in financing activities (151,629) (161,931)
--------- -----------
Net increase (decrease) in cash 21,775 (380,880)
Cash, beginning of period 68,902 449,782
--------- -----------
Cash, end of period $ 90,677 $ 68,902
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 70,253 $ 126,006
========= ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On October 29, 1997, the Company issued 2,666,667 shares of common stock to
settle outstanding debt plus accrued interest in conjunction with the
disposition of a subsidiary. The stock was valued at: $ -- $ 500,000
========= ===========
On March 5, 1998, the Company sold certain equipment in exchange for a
promissory note and an executed service agreement for free lab services. The
note and lab services
were valued at: $ -- $ 93,878
========= ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
ECOS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Shares of Shares of Series B Additional
Common Series B Preferred Common Paid-in
Stock Preferred Stock Stock capital
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances 3/31/97 17,597,626 1,000,000 $1,000 $211,172 $16,124,228
----------------------------------------------------------------
Issuance of Stock
(conversion of debt) 2,666,667 32,000 468,000
Options exercised 2,400 27 670
Write-off marketable
securities
Net Loss
----------------------------------------------------------------
Balances 3/31/98 20,266,693 1,000,000 $1,000 $243,199 $16,592,898
----------------------------------------------------------------
Net Income
----------------------------------------------------------------
Balances 3/31/99 20,266,693 1,000,000 $1,000 $243,199 $16,592,898
----------------------------------------------------------------
<CAPTION>
Net Unrealized
Loss on
Marketable Accumulated
Securities Deficit Total
---------------------------------------------
<S> <C> <C> <C>
Balances 3/31/97 $(10,000) $ (9,030,027) $ 7,296,373
---------------------------------------------
Issuance of Stock
(conversion of debt) 500,000
Options exercised 697
Write-off marketable
securities 10,000 10,000
Net Loss (9,155,369) (9,155,369)
---------------------------------------------
Balances 3/31/98 $ -- $(18,185,396) $(1,348,299)
---------------------------------------------
Net Income 320,770 320,770
---------------------------------------------
Balances 3/31/99 $ -- $(17,864,626) $(1,027,529)
---------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Organization
Ecos Group, Inc. ("The Company") is engaged, through its wholly-owned
subsidiary, Evans Environmental and Geological Science and Management,
Inc., in environmental consulting and other environmental related services.
ECOS Group, Inc. is a Colorado corporation with its principal office in
Miami, Florida.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All intercompany balances and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Equivalents
The Company classifies as cash and equivalents all highly liquid
investments which present insignificant risk of changes in value and have
maturities at the date of purchase of three months or less. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in
such accounts.
Marketable Securities
The Company classified its investments in marketable securities as
available-for-sale and reported them at fair value with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' deficit. As of March 31, 1997, the Company had classified as
available for sale investments with an original cost of $350,000. During
fiscal year ending March 31, 1997, the Company recorded a write down of
$200,000 for one of its marketable securities as it deemed a decline in
market value below its cost to be other than temporary. During fiscal year
ending March 31, 1998, one of the Company's two marketable securities
investments sustained a permanent decline in market value below the cost of
$75,000. Consequently, the Company reflected the decline in market value in
operations. The other marketable securities investments consisted of
securities in Dawson Science. During the fiscal year March 31, 1998, the
Company attempted to sell the securities and was informed by the transfer
agent that the share certificates had been reported lost by one of Dawson
Science's directors. While the Company has sought legal counsel, the
Company believes that pursuing further legal action would prove cost
prohibitive. Therefore, the Company's investment in Dawson Science of
$75,000 was written off and reflected in operations for Fiscal 1998.
F-7
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight line method over the estimated useful lives of the assets for
financial reporting purposes. New useful lives for machinery and equipment
were established effective April 1, 1998 that, in the Company's opinion,
more appropriately reflect the Company's financial results by better
allocating costs of new property over the estimated useful lives of these
assets. As a result of this change in accounting estimate, there was no
effect on the Company's net loss for the year ended March 31, 1998.
The following estimated useful lives are used for financial statement
purposes:
Computers and equipment 3 years
Automobiles 5 years
Furniture and fixtures 3 years
Leasehold improvements Lesser of 15 years or the term of the lease
Goodwill
Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized on a straight-line basis over fourteen years.
The Company periodically reviews the carrying value of goodwill in relation
to current and expected operating results of the business that benefit
therefrom in order to assess whether there has been a permanent impairment
of goodwill.
In connection with the Company's periodic review, the consulting division's
closing of certain offices, and its disposition of certain operations
during the 1998 fiscal year, the Company wrote off approximately $5,863,000
of goodwill during the year ended March 31, 1998. (See Note 18 -
Discontinued Operations).
Revenue Recognition
Consulting revenue is recognized as services are performed.
F-8
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting Policies (Continued)
Year 2000 Systems Costs
The Company utilizes software and related technologies throughout its
businesses that will be affected by the date change in the year 2000. The
Company is in the process of evaluating the full scope and related costs to
insure that the Company's systems continue to meet its internal needs and
those of its customers. Anticipated costs for system modifications will be
expensed as incurred and are not expected to have a material impact on the
Company's consolidated results of operations. However, the Company cannot
measure the impact that the Year 2000 issue will have on its vendors,
suppliers, customers and other parties with whom it conducts business.
Income Taxes
The Company utilizes the liability method of accounting for deferred income
taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of asset and liabilities using tax rates in effect for the year in
which the differences are expected to reverse.
Earnings per Share
The Company computes earnings per share in accordance with the provisions
of SFAS No. 128, "Earnings per Share." In SFAS No. 128, basic earnings per
share (EPS) is based upon the weighted average number of common shares
outstanding and excludes the dilutive effects of potential common stock
from the exercise of stock options. Similarly, diluted EPS reflects the
potential dilution that could occur if dilutive securities and other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company. EPS computations were based on weighted average
common shares outstanding of 20,266,693 and 18,717,508 for the years ended
March 31, 1999 and 1998, respectively. Diluted EPS computations for March
31, 1999 was based on weighted average common shares of 34,780,499,
assuming the conversion of 1,737,500 common stock option shares, 10,024,334
common stock warrants, 10,000,000 Series B convertible preferred stock and
7,504,141 shares issued in the first quarter of Fiscal 2000. For March 31,
1998, potential common shares were not included in the weighted average
common shares outstanding as they were anti-dilutive.
Discontinued Operations
During fiscal March 31, 1998, certain wholly-owned subsidiaries ceased
operations and disposed of all operating assets. As such, the Company has
treated these subsidiaries as discontinued operations for all periods
presented. (See Note 18 - Discontinued Operations).
F-9
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting Policies (Continued)
Relocation of Corporate Offices
In December, 1997, the Company relocated its corporate offices in West Palm
Beach and consolidated its operations with Evans Environmental and
Geological Sciences and Management, Inc. in Miami, Florida. In Fiscal 1998,
the Company wrote off $146,543 in leasehold improvements and software
development costs as a result of the closure.
Stock Based Compensation
Compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Customers and Client Base
The majority of the Company's customers are located in Florida. A
significant amount of the Company's revenues are derived from governmental
agencies.
Concentrations of credit risk with respect to trade receivables are
generally limited due to the large number of clients comprising the
Company's client base and their diverse industries. The Company establishes
an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific clients, historical trends and other information.
For the fiscal year ended March 31, 1999, one of the Company's customers
represented nearly 11% of the Company's revenues but only 4% of the
accounts receivable. Also, the top ten customers of the Company combined
comprised 51% of the total revenues and 41% of the accounts receivable. For
the fiscal year ended March 31, 1998, two of the Company's customers
combined represented 11% of the Company's revenues and 13% of the Company's
accounts receivable.
New Accounting Pronouncements
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to report by major components and
in total, the change of its net assets during the period from non-owner
sources. The adoption of SFAS No. 130 did not have a significant effect on
the Company's financial position, results of operations, or cash flows.
F-10
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting Policies (Continued)
Reclassifications
Certain amounts previously reported have been reclassified in the 1998
financial statements to conform to the 1999 financial statement
presentation.
3. Going Concern
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Despite its
profitability in Fiscal 1999, the Company suffered significant net losses
for the years ended March 31, 1998 and 1997 and currently has a working
capital deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management has developed
a plan that will include, but is not limited to, the following actions to
fund its working capital requirements and raise capital to achieve its
growth:
1. Continued limited support of funds from related parties as discussed
herein.
2. Continue cost reduction measures in the consulting division and the
holding company.
3. Seek outside financing from banks or other lenders.
4. Increase profitability through sales growth in Fiscal 2000 while
continuing to reduce costs.
Management continues to implement its plans. However, actual results may
differ from management's plans.
4. Acquisition of American Remedial Technologies, Inc.
On July 8, 1996, the Company acquired all the outstanding stock of American
Remedial Technologies, Inc ("ART"). During this period, ART operated a soil
remediation facility in Lynwood, California, a natural outgrowth of its
current environmental consulting and remediation activities. The
acquisition was accounted for as a purchase and, accordingly, the purchase
price was allocated to the acquired assets and assumed liabilities, based
on their respective fair values. The excess (approximately $5,900,000) of
the purchase price over the fair values of assets acquired was recorded as
goodwill and was being amortized over 15 years on a straight line basis. As
a result of the sale of ART, the goodwill was written-off during 1998. (See
Note 18 - Discontinued Operations).
The purchase price of ART consisted of a cash payment of $6,000,000, the
issuance of 3,000,000 shares of unregistered Common Stock, of which 272,277
shares were subsequently registered, and the issuance of 1,000,000 shares
of Series B Convertible Preferred Stock. The Series B Convertible Preferred
Stock is convertible, subject to an earn-out formula, into a maximum of
F-11
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Acquisition of American Remedial Technologies, Inc. (Continued)
10,000,000 shares of Common Stock. The Series B Convertible Preferred
Stock, $.001 par value per share (the "Series B"), is not entitled to
receive any dividends and has a liquidation value of $.75 per share. The
holders of the Series B are entitled to elect six members to the Company's
Board of Directors. ART's President, Mr. Enrique A. Tomeu, became the Chief
Executive Officer of the Company. Only the par value was assigned to the
Series B shares issued in connection with the ART acquisition.
The purchase price was principally funded from a contemporaneous,
Regulation S stock offering by the Company as herein discussed. (See Note
12 - Stockholders' Equity).On October 23, 1997, ART was sold in exchange
for the satisfaction of debt and other consideration. (See Note 18 -
Discontinued Operations).
5. State Reimbursement Program Receivables
The Company continues to monitor governmental activities in Florida with
respect to changes in the Florida Inland Protection Trust (FIPT), which
provides for the remediation of contamination related to the storage of
petroleum and petroleum products. The State of Florida ceased the
processing of applications for new work under the Petroleum Contamination
Reimbursement Program under the FIPT with limited exceptions for certain
active sites. In its place, the State of Florida has implemented, under the
FIPT, a prioritized Petroleum Cleanup Program based upon a pre-approved
scope of work and costs.
The FIPT has begun payment of claims under a bond program that discounts
the amount due by 3.5% for each year the payment exceeds the potential time
frame without the bond program. Under this formula, the FIPT is paying the
newest claims first to maximize the effect of the discount. The Company
received payment for certain funded receivables. Currently, the Company is
not aware of when future payments will be forthcoming.
As of March 31, 1999, the Company had claims submitted to the FIPT, under
the prior program, totaling $179,008, net of reserves of approximately
$112,000. During the year ended March 31, 1999, the Company provided
reserves for potential unallowed claims, present value discounts on long
term receivables, and actual denials approximating $10,000.
Certain submitted claims have been financed under certain master funding
and subcontractor finance agreements. (See Note 8 - Notes Payable).
F-12
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Property and Equipment
Property and equipment at March 31, 1999 consisted of the following:
Computers and equipment $ 75,453
Automobiles 105,237
Furniture & fixtures 12,380
Leasehold improvements 4,200
--------
197,270
Less accumulated depreciation and amortization 155,860
--------
$ 41,410
========
Depreciation and amortization of property and equipment approximated
$45,000 and $166,000 for the years ended March 31, 1999 and 1998,
respectively.
7. Accrued Expenses
Accrued expenses at March 31, 1999 consist of the following:
Compensation and employee benefits $489,003
Self insurance reserve 100,000
Interest 26,673
Professional fees 51,164
Local and payroll taxes 22,565
Restructuring reserve 29,135
Other 111,769
--------
$830,309
========
F-13
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Notes Payable
Notes payable at March 31, 1999 consisted of the following:
Subcontractor finance agreements with recourse, Tier,
Inc., collateralized by specific receivables in
connection with the FIPT, with interest at prime (7.75%
as of March 31, 1999) per annum for 12 months, 5% per
annum for the following 6 months and 3% over prime
thereafter. The notes will be deemed paid upon the
lenders receipt of funds from the FIPT. $137,963
Subcontractor finance agreements with recourse,
Environmental Corporation of America, Inc.,
collateralized by specific receivables in connection
with the FIPT, with interest at prime (7.75% as of
March 31, 1999) per annum for 12 months, 5% per annum
for the following 6 months and 3% over prime
thereafter. The notes will be deemed paid upon the
lenders receipt of funds from the FIPT. 113,114
Note payable, resulting from the settlement of a claim
with one of the Company's attorneys, 8% interest per
annum, payable in monthly installments of $2,250 plus
interest. 13,000
---------
Total (all current) $ 264,077
=========
The Company sold receivables, which for financial reporting purposes have
been reported as a borrowing transaction, aggregating $251,077 at March 31,
1999, eligible for reimbursement under the FIPT. The Company also entered
into subcontractor finance agreements. Under these agreements, the finance
companies have funded these receivables which are eligible for
reimbursement under the FIPT. Under these agreements, the Company must
prepay interest for 12 months based on the prime rate at the time of
funding. Also, at the time of funding, the Company must prepay additional
interest at a rate of 5% to a reserve account for months 13 through 18. If
reimbursement from the FIPT takes more than 18 months, then interest must
be prepaid on a quarterly basis at the rate of prime plus 3%. The Company
is liable to the finance companies for any reimbursement denials. The
Company must pay any denied reimbursements within 10 days of notification.
(See Note 5 - State Reimbursement Program).
F-14
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies
Operating Leases
The Company leases certain office equipment, transportation equipment and
office space under operating leases that expire on various dates through
the fiscal year 2002. Many of these lease agreements contain annual rent
increases.
Future minimum annual rental payments are as follows:
Year ending March 31,
---------------------
2000 $254,099
2001 29,075
2002 4,793
--------
Total $287,967
========
Total rental expense incurred approximated $245,000 and $302,000 for the
years ended March 31, 1999 and 1998, respectively.
Employment Agreement
The Company's former Chief Executive Officer and President was employed
pursuant to a four year employment agreement dated July 8, 1996. The
agreement provided for an annual salary of $150,000, expense allowance for
business use and travel, incentive compensation, life insurance and
disability benefits. On November 17, 1998, the Officer's employment was
terminated in exchange for valuable consideration received by the Company.
(See Note 19 - Extraordinary Items).
Contingent Liability
The Company has been involved in various discussions with a former private
senior lender to the Company. The purpose of these discussions has been to
settle all outstanding differences between the former lender and the
Company regarding a variety of matters including, without limitation, the
exercise price of the former lender's outstanding warrants, amounts claimed
to be owed to the former lender for legal and financial advisory fees,
shares claimed to be owed to the former lender for the loan of funds and
services rendered, and claimed rights to additional shares of the Company's
stock. Although all cash amounts owed to the former lender for principal
and interest were paid in full in July, 1996, the former lender made
demands on the Company, as well as asserting enforceability of claimed
agreements. Although the Company has rejected the validity of all such
claims, it has agreed to reach an accommodation with the former lender on
some of these claims solely for the purpose of reaching a definitive
settlement of all
F-15
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies (Continued)
Contingent Liability (Continued)
outstanding differences. To date, the former lender has not agreed to any
settlement. The Company is unable to foresee the ultimate outcome of this
matter.
NASDAQ Delisting
The Company's shares were delisted from the NASDAQ Small Cap Market
effective January 2, 1998. The Company did not meet NASDAQ requirements for
total capital and surplus of $2,000,000. The Company's plan for maintaining
compliance with NASDAQ listing requirements was rejected and the Company
received notification of delisting December 17, 1997.
Litigation
The Company is involved in a legal proceeding, seeking an unspecified
amount of damages, regarding the failure to disclose the existence of
underground tanks. The properties were not alleged to have been
contaminated. The Company and its legal counsel believe the claim is
without merit and have vigorously contested the matter. The accompanying
financial statements do not reflect any adjustments for this uncertainty.
The Company is also the subject of a lawsuit alleging breach of contract on
behalf of the Company. The Company believes it has adequate legal defenses
with respect to the action and has and will continue to vigorously defend
against the action. However, it is reasonably possible that this action
could result in an outcome unfavorable to the Company. While the Company
currently believes that the amount of the ultimate potential loss would not
be material to the Company's financial position, the outcome of this action
is inherently difficult to predict. In the event of an adverse outcome, the
ultimate potential loss could have a material adverse effect on the
Company's financial position or reported results of operations. Management
has provided a reserve of $100,000 for this uncertainty.
The Company is exposed to various asserted and unasserted potential claims
encountered in the normal course of business. In the opinion of management,
the resolution of these matters will not have a material adverse effect on
the Company's financial position or the results of its operations.
F-16
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Related Party Transactions
Debt
In July, 1995, the Company borrowed $85,000 from the spouse of the Chairman
of the Board of Directors. The note is due upon demand and bears interest
at 12% per annum. The Chairman disclaims any beneficial interest in the
loan. The balance of this note is $15,000 at March 31, 1999.
On December 31, 1996, the Company borrowed $1,000,000 from a
shareholder/director of the Company pursuant to a one year promissory note
bearing interest at 14% per annum. For the first three months of the note,
while the Company sought alternative long-term financing, the note was
unsecured with interest only payable monthly. Commencing March, 1997,
monthly payments of principal and interest were required until maturity in
December, 1997, and the note was secured by all trade accounts receivable
of the Company. This note was repaid on May 5, 1997 from proceeds of a
$1,000,000 loan received from the father of the shareholder. This latter
note was modified to a three month promissory note maturing on August 5,
1997, with monthly interest only payable at 12% per annum. The note was
secured by all trade receivables of the Company. On September 23, 1997, the
Company received a notice of its default on this note for nonpayment of
principal and interest. The Company settled its default on this note by
delivering a $608,000 promissory note dated October 29, 1997 in favor of
the shareholder's father, bearing interest at 12% per annum with quarterly
principal and interest payments of $40,867, and agreeing to issue 2,666,667
shares of the Company's Common Stock. The new note and the agreement to
issue stock extinguishes the $1,000,000 promissory note dated May 5, 1997.
The balance of this note is $487,869 at March 31, 1999.
In May, 1997, the Company borrowed $72,000 from the mother of a former
director and shareholder of the Company. The loan is due upon demand and
bears interest at 12% per annum. The balance of this loan is $72,000 at
March 31, 1999.
During 1997, the Company's remediation division had a note payable to an
affiliated company under common ownership of the Company's then chief
executive officer for $303,000 with a 13.5% interest rate. On November 17,
1998 a mutual agreement was reached between the Company and its then chief
executive officer to terminate their four-year employment contract dated
July 8, 1996.
In exchange for termination of the employment contract, the chief executive
officer agreed to release the company from $354,337 obligation payable to
the chief executive officer in the form of a note payable as well as
surrender 633,365 shares of Series B Convertible Preferred Stock of the
Company. These shares are currently being held by EE&G, the Company's
subsidiary.
F-17
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Related Party Transactions (Continued)
The aggregate maturities of related party notes payable are as follows:
Years ended March 31,
2000 $196,741
2001 123,514
2002 139,017
2003 115,597
--------
$574,869
========
Settlements of Debt in Exchange for Stock
During October, 1997, the Company agreed to convert certain debt
outstanding to equity securities of the Company. The debt outstanding was
originally payable to the father of one of the Company's major
stockholders. This transaction resulted in a gain, net of expenses of
$25,461. This gain is included in the March 31, 1998 Statement of
Operations.
11. Income Taxes
The Company utilizes the liability method of accounting for deferred income
taxes. There was no provision for income taxes due to operating losses. The
significant components of the deferred taxes as of March 31, 1999 were as
follows:
Deferred tax assets:
Bad debt reserves $ 61,610
Other reserves 10,197
Accrued expenses 35,000
Property and equipment 10,492
Federal net operating and
capital loss carryforward 1,573,157
Valuation allowance (1,690,456)
-----------
$ --
===========
Deferred tax liabilities: $ --
===========
The Company experienced a change in ownership, as defined by Internal
Revenue Code Section 382, related to the issuance of shares of stock in
connection with the acquisition of ART in July, 1996. The changes in
ownership resulted in annual limitations on the amount of net operating
losses that can be utilized which were incurred prior to such ownership
changes.
F-18
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes (Continued)
At March 31, 1999, the Company had $19,486,000 of net operating loss
carryforwards. The net operating losses begin to expire in the fiscal year
ending March 31, 2007. $14,992,000 of the net operating losses have been
suspended until after the Company has paid all payroll taxes previously
compromised as discussed in Note 19. The remaining net operating losses of
$4,494,000 that arose after the IRS settlement date are available to offset
future taxable income.
The Company has provided a valuation allowance against deferred tax assets.
The allowance is based on the weight of available evidence that is more
likely than not that some or all of the deferred tax assets will not be
realized. Due to the payroll tax issue discussed in Note 19 and the history
of operating losses, it is management's belief that it is more likely than
not that the deferred tax asset will not be realized; and accordingly, the
Company has established a valuation allowance against deferred tax assets
of $1,690,456 at March 31, 1999. The change in the valuation allowance
during the year ending March 31, 1999 relates principally to the amount of
net operating losses and capital losses that are available after March 31,
1997 (net of March 31, 1999 taxable income).
12. Stockholders' Equity
Series A Preferred Stock
The Series A Convertible Preferred Stock (the "Series A"), is entitled to
receive cumulative preferential dividends at the rate of $.0512 per share,
per annum, payable either in cash or in common stock of the Company. Each
share of the Series A non-voting, preferred stock is convertible into five
shares of the Company's common stock. The Series A contains certain
liquidation rights in the event of any liquidation, dissolution or winding
up of the Company. The liquidation value is $.75 per share of Series A,
plus any accrued and unpaid dividends. The Company may redeem the Series A
Preferred Stock at a price of $.75 per share, in whole or in part, at any
time commencing two years after its issuance. The Company's Series A
stockholders have preference over Series B and common stockholders in
dividends and liquidation rights. At March 31, 1999 and 1998, respectively,
there were no Series A preferred shares issued or outstanding.
F-19
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Stockholders' Equity (Continued)
Series B Preferred Stock
The Series B Convertible Preferred Stock (the "Series B") is not entitled
to receive any dividends and has a liquidation value of $.75 per share.
Series B stockholders have preference over common stockholders in
liquidation rights. The holders of the Series B, except as provided by law,
are not entitled to vote upon any matters relating to the business or
affairs of the Company except with respect to the election of six directors
to the Company's Board of Directors, such directors designated as Series B
Directors. The Series B Stock is convertible, subject to an earn-out
formula, into a maximum of 10,000,000 shares of common stock. All of the
Series B Stock shall automatically expire and be canceled if not converted
before March 31, 2000. At March 31, 1999 and 1998, respectively, there were
1,000,000 Series B preferred shares issued and outstanding.
Common Stock
On October 29, 1997, the Company issued 2,666,667 shares of common stock in
exchange of an outstanding debt of $464,000 plus accrued interest in
conjunction with the disposal of American Remedial Technologies, Inc. (see
Note 18 - Discontinued Operations). The shares were issued to Sam W. Klein,
the father of a shareholder/director of the Company. As a result, the
Company recorded a gain of $25,641. The total exchange price was $525,461.
As of March 31, 1999, the Company has not registered these shares with the
U.S. Securities and Exchange Commission. However, the Company does intend
to register these shares once it becomes current in its financial reporting
with the SEC and when the registering no longer presents an undue financial
burden on the Company. (See Note 10 - Related Party Transactions)
During the year ended March 31, 1998, options were exercised for 2,400
shares of Common Stock for total proceeds of $697. No options were
exercised in the year ended March 31, 1999.
<TABLE>
<CAPTION>
Earnings per Share
For the Year Ended March 31, 1999 For the Year Ended March 31, 1998
-------------------------------------- ---------------------------------------
Income Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income (Loss) before discontinued
operations $320,770 $(1,676,588)
Less: Preferred stock dividends -- --
-------- -----------
Basic EPS
Income (Loss) allocable to
Common stockholders $320,770 20,266,693 $.016 $(1,676,588) 18,717,508 $(.09)
======== ========== ===== =========== ========== =====
Diluted EPS
Income (Loss) allocable to
Common stockholders $320,770 34,780,499 $.009 $(1,676,588) 18,717,508 $(.09)
======== ========== ===== =========== ========== =====
</TABLE>
F-20
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Stockholders' Equity (Continued)
Earnings per Share (Continued)
Common stock option shares and common stock warrants which could
potentially dilute basic EPS in the future were included in the computation
of diluted EPS for March 31, 1999. For March 31, 1998, potential common
shares were not included in the weighed average common shares outstanding
as they were anti-dilutive. The securities consist of the following:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------------------------- -------------------------------
Price Per-Share Shares Price Per-Share Shares
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Potentially issuable common shares
from the exercise of:
Warrants and options (1) 10,024,334 $.29-$10.50 3,911,443
Employee stock options $.0312-$.10 1,737,500 $.29-$ 1.38 868,208
Series B Convertible Preferred Stock (2) 10,000,000 (2) 10,000,000
Stock issued for past compensation (3) 7,504,141
</TABLE>
- ----------
(1) 7,364,141 shares are exercisable at 110% of market price, the remainder
range from $1.00 to $2.70.
(2) Series B Convertible Preferred Stock price per-share is subject to an
earn-out formula.
(3) In June, 1999 Common stock was issued for past compensation due to
directors and officers.
13. Warrants and Options
Warrants and options outstanding to purchase common stock of the Company at
March 31, 1999, consist of the following:
<TABLE>
<CAPTION>
Common
Issue Expiration Exercise Stock
Date Date Price Issuable
------ ---------- -------- --------
<S> <C> <C> <C> <C>
Issued in connection with:
Line of credit Jul 94 Jan 02 $2.70 175,000
Line of credit and consulting agreement Apr 95 Jan 02 (1) 2,285,193
Consulting agreement Dec 95 Dec 99 $1.00 50,000
Corporate relations agreement Aug 96 Aug 99 $2.70 150,000
Past due compensation of
Directors and officers Mar 99 Mar 04 (2) 7,364,141
----------
10,024,334
==========
</TABLE>
- -----------
(1) Warrants are to purchase 761,731 shares of Series A preferred stock. The
Series A preferred stock are convertible into 2,285,193 shares of common
stock. The exercise price is constantly reset to the 10 day prior trading
average price of the Company's common stock up to a maximum exercise price
of $2.70 for each share of underlying common stock.
(2) Warrants are exercisable at 110% of the average market price for the ten
trading days immediately following the Company becoming current with its
SEC filings.
F-21
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Stock Option Plans
The Company has two stock option plans that provide for the granting of
stock options to directors, officers and key employees of the Company or
its subsidiaries. The objectives of these plans include furthering the
growth of the Company and its subsidiaries by offering incentives to
directors, executive officers and other key employees of the Company, to
continue to attract and retain the best personnel and to increase the
interest of these employees in the Company through additional ownership of
its common stock. Under both of these plans, the Board of Directors
determines the option price (not to be less than fair market value for
incentive options) at date of grant, whether the options will be
non-qualified or incentive options and the timing of how the options will
become exercisable.
Under the January 29, 1993 plan, ("1993 Stock Option Plan") the Company is
authorized to grant non-qualified and incentive options for up to 400,000
common shares. The options shall expire no more than 10 years from date of
grant. There are no options currently outstanding for this plan which has
almost 365,000 shares available.
On August 15, 1996, the Company established the second stock option plan
(the "1996 Stock Option Plan") that provides for the granting of options of
up to 2,000,000 shares of the Company's common stock. The options shall
expire not more than 20 years from date of grant. In November, 1996,
225,000 options covered by this Plan were granted to three key employees at
an exercise price of $1.31. These options expired in November, 1998. During
fiscal 1999, an additional 1,737,500 shares were granted under this plan to
directors, executive officers and key employees. During June, 1999, the
Company waived the option price and issued 1,637,500 of these shares (See
Note 22 - Subsequent events).
Other Stock Options
Outside of the 1993 Stock Option Plan, the Company has also issued an
aggregate 8,125 options to certain senior and middle management personnel
at an exercise price of $0.88 per share. All said options expired unused in
June, 1998.
Additionally, in June, 1996 the Company issued an aggregate of 550,000
options to certain officers, consultants and directors. These options
expired unused in June, 1998.
F-22
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Stock Option Plans (Continued)
Other Stock Options (Continued)
The following table reflects the 1993 and 1996 Plans' option activity for
the years ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Exercise
1999 Price 1998 Price
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 868,208 $1.25 877,083 $1.21
Granted 1,737,500 .10 -- --
Exercised -- -- 2,400 .29
Expired 868,208 1.25 6,475 1.00
---------- ----- ---------- -----
Options outstanding at
end of year 1,737,500 .10 868,208 1.25
---------- ----- ---------- -----
Options exercisable at
end of year 1,228,125 $ .10 868,208 $1.25
========== ===== ========== =====
Price range of options
outstanding at end of year $.031-$.10 $.29-$1.38
Weighted-average remaining
contractual life of options outstanding 2 Years 2 Years
Options available for future
grants at end of year 627,000 1,225,000
========== ==========
Weighted-average fair value
of options granted 1,737,500 $ .01 868,208 $ .18
========== ===== ========== =====
</TABLE>
The Company has elected to account for the stock option plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation
expense has been recognized for the stock options.
Had compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the
methodology prescribed under Statement of Financial Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss)
would have been increased (decreased) by approximately $54,000 and
$(812,000) in 1999 and 1998, respectively. The weighted average fair value
of the options granted during 1999 and 1998 was estimated using the
Black-Scholes option pricing model using the following assumptions:
1999 1998
---- ----
Risk-free interest rate 5.1% 5.5%
Expected life (years) 2 2
Expected volatility 33% 35%
Expected dividends None None
F-23
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Reserve for Restructuring
During the first quarter of fiscal year 1997, the Company recorded a
special charge of $350,000 for the restructuring of its operations and
integration with ART, which was acquired in July, 1996. These costs
included accruals for severance pay, real and personal property lease
terminations, relocation costs for certain offices and other costs
associated with the streamlining of operations and administrative
functions. As of March 31, 1999, approximately $30,000 of the charge had
not yet been utilized.
16. Segment and Related Information
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued effective for fiscal years ending
after December 15, 1998. The Company's reportable segments are strategic
business units that offer different products and services. They are managed
separately because each business requires different technology and
marketing strategies.
The company has three reportable segments: Asbestos Practice, Hazardous
Substance Practice and Indoor Air Quality Practice. The Asbestos Practice
provides a comprehensive suite of asbestos consulting services, including,
building inspections, laboratory analysis of building materials, abatement
design specifications, training and expert witness testimony. The Hazardous
Substance Practice staff of Geologists, Engineers and other Hazardous
Materials staff provide soil and groundwater assessment and remediation,
petroleum storage tank management and compliance audits. The Indoor Air
Quality Practice's projects include industrial hygiene evaluations, lead
based paint services and other indoor air quality related services.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on gross profit (gross revenues net of subcontractor and
other direct expenses) of the respective business units. Segment
information for the Fiscal years 1999 and 1998 was as follows:
1999 1998
---------- ----------
REVENUES:
Asbestos $2,048,554 $2,176,948
Hazardous Substances 2,217,922 2,159,807
Indoor Air Quality 547,640 510,064
---------- ----------
Total $4,814,116 $4,846,819
GROSS PROFIT:
Asbestos $ 878,180 $1,049,349
Hazardous Substances 833,012 783,760
Indoor Air Quality 248,935 233,642
---------- ----------
Total $1,960,127 $2,066,751
The Company has no significant identifiable assets for the reportable
segments.
F-24
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Sale of Laboratory Assets
On June 6, 1997, the Company sold to an unrelated company, its secured
claim to all assets from a previously disposed wet chemistry laboratory
operation for total consideration of $110,000. The company subsequently
filed under Chapter 11 and defaulted on the note. The Company reclaimed the
equipment securing the note from the bankruptcy court. On March 5, 1998,
the equipment was resold to an unrelated company for a total consideration
of $93,878. The total sales price is payable by a promissory note in the
principal amount of $23,878, which note bears interest at 9% per annum
payable in equal monthly installments over 12 months from the closing date
and an executed service agreement for free lab services valued at $70,000.
The note and service agreement are secured by the assets acquired. As of
March 5, 1999, the note was in default. Because the collectability is
uncertain, the Company recorded a $23,878 bad debt provision in the year
ended March 31, 1999.
18. Discontinued Operations
Merger of a Certain Subsidiary's Operations with Parent Company
On October 29, 1993, pursuant to a share exchange, the Company acquired
100% of the capital stock of Enviropact Consultants, Inc. ("ECI"). ECI was
formed by Enviropact, Inc. (the "Debtor"), which had filed a petition
pursuant to Title 11, as amended, of the United States Code.
The transaction was treated as an acquisition, utilizing the purchase
method, with the investment in ECI of approximately $2,756,000, consisting
of the shares and other cash and non-cash consideration, allocated to
assets and liabilities of ECI based on their estimated fair value as of
October 29, 1993, the date of acquisition. The cost, in excess of net
assets acquired, was approximately $1,765,000 and was being amortized on a
straight-line basis over 14 years (See Note 2 - Significant Accounting
Policies, for a further discussion of goodwill).
In late 1997, the Company began winding down the operations of ECI and
reduced ECI's labor force to three employees. In addition, a decision was
made by the Company to merge the operations of ECI with that of the Parent.
Consequently, a $365,000 charge to income was recorded in the year ended
March 31, 1998 relating to the write-off of goodwill in ECI.
Disposal of Soil Remediation Division
On October 23, 1997, the Company disposed of American Remedial
Technologies, Inc. ("ART") by transferring all of the Common Stock of ART
to Messrs. Mark Patton, Fred Miller and Joe Torres Jr., the holders of a
$500,000 promissory note receivable from ART, in complete atisfaction of
the debt. The Company originally purchased ART for $7,500,000 on July 8,
1996, as discussed in Note 4 - Acquisition of American Remedial
Technologies, Inc.
In addition, the Company received 100,000 shares of Series C convertible
preferred stock in ART in exchange for complete satisfaction of a note
receivable by the Company from ART amounting to $1,322,224. Preferred stock
was issued relating to the related party debt.
F-25
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Discontinued Operations (Continued)
Disposal of Soil Remediation Division (Continued)
In October, 1997, the Company recorded a loss of approximately $6,448,000
on the disposal of its Soil Remediation Division.
The Company has shown the results of the Soil Remediation Division
separately as discontinued operations in the consolidated financial
statements. Summarized results of the Division for its final six months of
operations during the year ended March 31, 1998, was as follows:
Revenues $ 1,661,380
Expenses 2,327,620
-----------
Net Loss $ (666,240)
===========
19. Extraordinary Items
Settlement of Delinquent Payroll Taxes
As of March 31, 1996, the Company had accrued approximately $1,381,000 to
the Internal Revenue Service (IRS) for delinquent payroll taxes, interest
and penalties. On June 28, 1996, the Company's Consulting Division and the
IRS completed an Offer and Compromise Agreement, settling all outstanding
payroll issues and disputes. In connection with the settlement, the Company
paid the IRS an aggregate of $350,000 and agreed to suspend the use of
certain net operating loss tax carryforwards. The net operating loss
carryforwards temporarily suspended would have been available to offset
future taxable income. As a direct result of this settlement, the Company
recorded a gain of approximately $940,000, net of professional fees and
costs in prior years. The Company may take advantage of the net operating
losses suspended pursuant to the offer and compromise on their future tax
returns after all compromised payroll taxes along with interest and
penalties are paid in full.
Vendor Settlements
During April, 1996, the Company executed a Composition Agreement with
certain of its trade creditors. The Company, due to its limited cash flow
situation, began negotiating with these creditors in September, 1995. These
creditors formed an Informal Creditors Committee, who hired both legal and
accounting professionals. Negotiations were finalized in April, 1996, with
over 75% of the creditors accepting a payout of $.20 for each $1.00 of
their allowed claim. The payout was made in April, 1996 from funds that the
Company had previously put into escrow. The Company recorded a benefit, net
of expenses, of approximately $286,000 related to completed vendor
settlements for the year ended March 31, 1997. As of March 31, 1998, the
Company continues to negotiate with the creditors who rejected the
Company's offer and carries a $203,857 provision for creditors who rejected
the Company's 1996 offer.
F-26
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Extraordinary Items (Continued)
Settlement of Attorney's Fees
On November 12, 1998, the Company executed a Settlement Agreement for a
claim payable to one of its attorneys. As a result, the Company recorded a
gain, net of expenses, of $230,000, during the year ended March 31, 1999.
Termination of Employment Agreement
On November 17, 1998, a mutual agreement was reached between the Company
and its Chief Executive Officer to terminate their four-year employment
contract dated July 8, 1996. In exchange for the termination, the Officer
agreed to release the Company from a $354,337 obligation payable to the
Officer in the form of a note payable as well as surrender 633,365 shares
of Series B Convertible Preferred Stock of the Company. As a result, the
Company recorded a gain of $354,337 during the year ended March 31, 1999.
These shares are currently being held by EE&G, the Company's subsidiary.
20. SEC Filings
For the quarters ended September 30, 1997 and December 31, 1997, the
Company filed Forms 10-QSB with the Securities and Exchange Commission
reflecting common shares issued and outstanding of 19,489,826 and
22,156,493, respectively. The actual number of common shares issued and
outstanding as of September 30, 1997 and December 31, 1997 was 17,600,026
and 20,266,693, respectively.
21. Joint Venture with a Foreign Entity
On March 5, 1998, the Company entered into a joint venture with a foreign
entity to engage in consulting and management services in France. As of
March 31, 1999, the foreign entity was delinquent in its obligations to the
Company and Management was evaluating collection strategies. Consequently,
Management does not believe that this joint venture will move forward.
22. Subsequent Events
Stock Option Plans and Stock Issued for Past Due Compensation
On June 4, 1999, the stock option price of 1,637,500 options covered by the
current plan was waived and stocks were issued to the employees holding the
options. Additionally, in payment of past due unpaid compensation, the
Company issued 7,364,141 shares of stock to its Directors and Officers.
Using the market price at the time of issuance of $.039, a stock
compensation expense of $351,065 was recorded in the year ended March 31,
1999. These shares issued were included in the calculations for diluted
earnings per share in the year ended March 31, 1999.
F-27
<PAGE>
ECOS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S CONSENT
As independent auditors, we hereby consent to the use of our report for ECOS
Group, Inc. and Subsidiary, dated June 22, 1999, and to all references to our
Firm included in or made part of this Registration Statement.
MORRISON, BROWN, ARGIZ & COMPANY
Miami, Florida
July 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 90,677
<SECURITIES> 0
<RECEIVABLES> 1,151,348
<ALLOWANCES> 152,151
<INVENTORY> 0
<CURRENT-ASSETS> 1,156,796
<PP&E> 197,270
<DEPRECIATION> 155,860
<TOTAL-ASSETS> 1,682,751
<CURRENT-LIABILITIES> 2,332,152
<BONDS> 0
0
1,000
<COMMON> 243,199
<OTHER-SE> (1,271,728)
<TOTAL-LIABILITY-AND-EQUITY> 1,682,751
<SALES> 4,814,116
<TOTAL-REVENUES> 4,814,116
<CGS> 2,853,989
<TOTAL-COSTS> 2,853,989
<OTHER-EXPENSES> 1,593,666
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,691
<INCOME-PRETAX> 320,770
<INCOME-TAX> 0
<INCOME-CONTINUING> 320,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320,770
<EPS-BASIC> 0.016
<EPS-DILUTED> 0.009
</TABLE>
